Toy Plc. makes special toy cars which it sells to retailers for K25, 000 per toy car. Retailers sell the toy cars to consumers for K40, 000 each.

Budgeted information for the following year:

Production and sales 200, 000 toy cars

Fixed overheadK2, 400, 000, 000

Variable costs per toy carK6, 500

Recently, the retailer has started using their buyer power over Toy Plc. demanding a discount off the existing price charged to them. Directors of Toy plc. fear that they may lose business if they do not offer some discount to their customers and have asked for advice from a market research consultancy firm.

The consultants have suggested that Toy plc. need to reduce the selling price charged to retailers by a minimum of 10% if they are to retain existing customers. The consultants, however, believe that Toy plc. can use some buyer power of their own over the suppliers of materials such that the variable cost per toy car would fall by 5%.

REQUIRED

Based upon the existing selling price and variable cost per toy car:

Calculate the breakeven point in units and value (5 Marks)

Calculate the margin of safety as a percentage of budgeted sales volume and explain its meaning to Toy plc. directors (5 Marks)

i. Draw the profit/volume chart (5 Marks)

Describe five limitations of breakeven analysis (5 Mark)